WASHINGTON -- President Clinton is facing his first major challenge in global economic leadership in a hostile bond market hurt by a weak dollar and nervous investors who are staying on the sidelines.
It is also a testy situation for Federal Reserve Board Chairman Alan Greenspan, who only last Wednesday told the House Budget Committee that "the outlook for the U.S. economy is as bright as it has been in decades" and that price trends "have remained subdued."
Clinton and his top advisers have continued to insist that the U.S. economy is strong, with good fundamentals -- a point that even jaded Wall Street analysts accept.
But Friday's sell-off in the dollar despite repeated rounds of intervention by the Fed and at least a dozen other central banks of the major industrial countries leaves the administration struggling with more than a currency problem. Investors also fled the stock and bond markets, pushing the Dow Jones industrial average down 62.15 points to 3636.94 points while the yield on the Treasury's 30-year bond climbed above 7.50%
"Every administration has to learn that the dollar is its responsibility and that allowing the dollar to go down is a very dangerous thing," said Scott Pardee, chairman of Yamaichi International [America] Inc.
"The U.S. is in a box because we have a widening current account deficit coupled with a capital account outflow," Pardee said. "Foreign investors have been scared out of this market, and bond markets around the .world are upset. Investors are sitting in cash."
The dollar's renewed weakness has spurred speculation in the bond market that Fed officials will have to raise rates on July 5 when they meet instead of waiting until August or even later. That in turn could put a damper on the economy and provoke the ire of Clinton.
"If we still have a falling dollar on Monday despite intervention, then the case for a tightening by the Fed becomes stronger," said Kathleen Camilli, chief economist for Maria Fiorini Ramirez Inc.
Camilli counted 17 different intervention moves Friday by central banks to buy dollars with German marks and Japanese yen. Besides the Fed, which acts at the direction of the U.S. Treasury Department, central banks from Denmark, Italy, Sweden, German, Ireland, the Netherlands, Portugal, Norway, Canada, Austria, France, and Belgium got into the act.
The intervention seemed to match in scope and intensity the May round of dollar-buying by central banks, when Treasury Secretary Lloyd Bentsen issued a statement saying that the dollar was undervalued. That round involved 16 nations and an estimated total of $3 billion to $5 billion, said Camilli.
Bentsen, in announcing Friday's central bank action, said the United States and its partners in the Group of Seven nations had a "shared concern about recent developments in financial markets."
Bentsen also hinted that the big central banks might be back-in the foreign exchange markets again soon if the dollar did not stabilize, saying, "we look forward to continued cooperation to maintain the conditions necessary for sustained economic expansion with low inflation."
President Clinton, who was traveling to St. Louis, endorsed the intervention in a radio interview aboard Air Force One and sought to play down any notion of crisis. Clinton said the dollar's weakness reflected Japan's large trade surplus and expectations that Germany's economy is on the rebound.
But late Friday afternoon the Treasury issued another statement attributed to a senior administration official that put greater urgency on the stakes. The official, who was not identified, said the administration "prefers a stronger dollar" and believes any further rise in the Japanese mark or the German yen "would be counterproductive for global recovery."
Appreciating currencies in Japan and Germany tend to make exports costlier and could harm efforts in both nations to expand their economies. The weak dollar, on the other hand, tends to add to U.S. inflation by making imports costlier.
"All in all, they've got to be bitterly disappointed to the market's response to the intervention," said Dana Johnson, head of capital markets research for First National Bank of Chicago. "It's just pathetic. There's a sense of blood on the Street that the central banks can't do it."
Some analysts said there was no fundamental reason for the dollar's softness or the glum state of the bond market. "Global capital markets are operating in a great matrix of irrationality," said Thomas Carpenter, chief economist for ASB Capital Management Inc.
Investor expectations of higher European rates from a rebounding German economy, rising commodity prices, and an upturn in the Japanese economy are all overblown and miss the underlying forces pointing toward low inflation, Carpenter said. "They see grain prices going up, but they don't see airline prices crashing. That's the problem," he said.
Some analysts said rising inflation expectations were behind the drop in the dollar. Others stressed worries over President Clinton's apparent waffling on a range of foreign policy and trade issues or said investors are looking for higher yields in European and Japanese markets.
"We're in a bear market for fixed-income assets in the U.S., particularly bonds," said Michael Strauss, senior financial economist for Yamaichi International. "Foreigners are leaving. They're losing money." Analysts also said perceptions of G-7 unity have been hurt by an apparent reluctance of the Clinton Administration to intervene as senior trade officials sought to use the threat of a weak dollar to put pressure on Japan in the trade negotiations.
